Flotek Industries, Inc. (FTK) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Flotek Industries' Second Quarter 2019 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Danielle Allen, Senior Vice President, Global Communications and Technology Commercialization for Flotek. Thank you. Madam, you may begin.

Thank you, and good morning, everyone. We appreciate your participation. With me on today's call are John Chisholm, Flotek's President and Chief Executive Officer and Elizabeth Wilkinson, our Chief Financial Officer. Yesterday afternoon we release our earnings press release for the second quarter of 2019, which is available on our Web site. In addition, this morning we posted a related supplemental presentation to our Web site. Today's call is being webcast, and a replay will also be available on our Web site. Please note that any comments we make on today's call regarding projections or our expectations for future events, are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual events to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call. Finally, after our prepared remarks will answer any questions you may have. So with that, I will turn it over to John.

Thanks, Danielle. We appreciate everyone who joining us for today's call. As we discussed on our first quarter call, we expected during the second quarter that the oilfield services sector would and in fact did continue to operate in a volatile environment for U.S. onshore drilling and completions activity. We anticipate a similar backdrop for the third quarter, which is in-line with the consensus of other oilfield service providers with U.S. land operations. Despite this environment, I'm pleased to report that we ended the second quarter with a cash balance of $97.5 million, which was essentially level with the balance reported from March 31st. We recognize that shorter cycles of continued and sometimes extreme volatility, are part of the new normal we operate in today, and will continue to experience in the foreseeable future. As discussed in a research report from Deloitte, published in April, titled, "Decoding the Oil and Gas Downturn", the oilfield services segment has never been more fragmented than it is today. Two main themes of the report are the service providers must distinguish themselves technologically, and they should also develop new and innovative commercial models throughout the value chain. This further supports and validates our continued focus on reshaping our business to proactively position ourselves for long term success. This includes controlling the controllables. Controllables can mean different things to different organizations. For Flotek, this meant concentrating on our core competencies as a best in class provider of reservoir sensory chemistry solutions for the oil and gas industry. In this capacity, we have and will continue to focus on; enhancing internal processes, while rightsizing the enterprise and taking costs out of the business to drive increased efficiency and profitability; closely collaborating with operators to identify and define industry challenges; ensuring we build technical peer to peer relationships with the specific individuals at our clients that have ultimate decision making responsibility for chemistry purchases; clearly communicating the significant benefits that our technologies can have on our clients' bottom-line results; and utilizing innovative commercial strategies to accelerate further adoption of our product offerings. We believe we are on the forefront of developing and providing industry leading reservoir centric chemistry solutions that drive greater capital effectiveness and return on investment for clients. During the second quarter, we took additional important steps to further differentiate our unique value proposition in the marketplace. One of those key initiatives was the rebuilding and development of a more technically oriented and client service focused sales organization. Historically, geologists, geophysicists and reservoir and petroleum engineers, had limited influence in the process of selecting chemistry solutions. The ultimate decision was typically made by the group with responsibility for well completion execution. However, in the past year, we have seen a transition in which technical positions connected directly with the reservoir are now taking a leading role in decision making as it relates to chemistry technologies. Significantly contributing to this enhanced approach by operators has been intensified emphasis on delivering greater asset productivity. As we partner to solve the technical challenges of our E&P clients, there's increasing recognition of the diminishing returns of mechanical variables in well completion designs, as shown on Slide 7 of the presentation. Variables such as lateral length, level of profit loading and number of fracs and frac stages per foot, have long been regarded as the best ways to access the reservoir for maximum recovery. However, these approaches have reached or are exceeding their economic and technical limits in certain basins, and thus many operators are turning or will turn their focus to other technologies, such as chemistry that can meaningfully and reliably enable productivity. As illustrated on Slides 8 and 9, we've seen many operators progressively exploring and better appreciating custom chemistry as a means to achieving optimal recovery of hydrocarbons from the reservoir as they evolve their approaches from capital efficiency to a more holistic strategy of driving capital effectiveness. Given this backdrop, we recognize the need for a sales force that better understands the technical complexities our clients face and that can more directly communicate the unique and compelling benefits provided by our chemistry solutions. In support of these efforts, at the end of April, we announced that Mark Lewis joined Flotek as Senior Vice President of Global Sales and Business Development. In this role, he is leading the company's domestic and international sales and business development strategies, as well as providing oversight for the delivery of products and services to our clients. Upon joining Flotek, Mark's first order of business was the reshaping of our sales force that began in the second quarter. Many of the candidates we spoke to in this process indicated that what attracted them to working at Flotek was the opportunity to interact directly with the end users and provide them with truly value added technology solutions, and what has traditionally been a very commoditized environment for chemicals. I'm pleased to report that over the past few months we recruited a first class group of professionals with a deep and diverse pool of technical expertise. As one would expect, it'll take time for the new team to get their feet on the ground. However, we've already begun to see a pickup in both client inquiries and requested technical reports. We look forward to seeing the impact of our new sales teams' efforts within the coming quarters. That said, we are continuing to gain traction with a number of strategic prospects for our proprietary value added chemistries and related technical services. We are seeing successes across a variety of applications, from completion, to remediation and even to enhanced water flooding activities, on the production side of the business. Additionally, we are partnering with our clients to address the prevention and mitigation of frac hits, which is one of the biggest challenges facing the industry today, as outlined on Slides 10 and 11. Frac hits, also called frac-driven interactions, occur when wells are spaced too closely together, creating communication between the primary or parent and infill or child wells. When this occurs, overall recovery from the reservoir can be significantly depleted, depending on the reservoir pressure and the timing of well completion. As a result, industry experts suggest that the production profile can be reduced by as much as half of the anticipated recovery. While you consider that, contemplate that 70% of new onshore wells drilled in the U.S. could be impacted according to Schlumberger. There is clearly no greater urgency than to solve this complex challenge as billions of dollars are at risk. That is why our technical teams are working alongside our clients' reservoir teams to validate the significant role that reservoir centric fluid chemistries is play in preventing and remediating frac hits. Last week, our Head of Research and Innovation, Dr. James Silas, highlighted our relevant findings at a Permian Basin industry conference here in Houston. Further, given the substantial positive uplift our chemistries have shown to improve hydrocarbon recovery, we're exploring how are chemistries can better enable capital efficiency as we, along with our clients, evaluate optimized spacing within their development programs. This could well mean that for maximum capital effectiveness fewer wells maybe drilled. In addition to mitigation and prevention of frac hits, the benefits afforded by our technologies is substantial, including higher incremental and sustained production levels and improved gas-to-oil ratio, lowering operating costs to reduce horsepower requirements and prevention of fluid incompatibilities, all of which lead to increased capital effectiveness. While this list of benefits is convincing, most clients conducted technical evaluation to see the results in their own operations before making a longer term commitment to new technologies. On our last earnings call, we discussed our utilization of targeted performance driven pricing programs for a limited number of strategic clients, which we initiated earlier this year. As anticipated, these programs impact our second quarter operating margins, and we expect continued margin pressure for the near-term as these particular clients complete their studies over the coming months. However, by the fourth quarter, we expect to begin to see the benefits of this initiative. Supporting our view are the studies we have done on thousands of wells in multiple basins that clearly show the benefits of our differentiated offerings. Slides 12 through 4 of our presentation show how customized prescriptions lead to sustain production enhancement. Specifically, we have now shown sustained uplift across hundreds of wells in the Wolfe Camp A and Wolfe Camp B in the Midland Basin nearly three years after completion. This allows us to be optimistic about the results of the client studies currently underway and more importantly, comfortable in our approach as it relates to this initiative. Our second quarter results were also impacted by the deferral of completions activity by certain clients primarily due to, both scheduled and unscheduled downtime in their programs. I would note that we've already seen these clients resume their completions activities in the third quarter, but believe we could see more anomalies of this sort occur in the third quarter and beyond, as white space in the calendar is being recorded by frac service providers. Turning to costs. On Slide 15, we show the results of our ongoing significant expense reduction efforts. During the second quarter, we identified more than $5 million of annualized spending cuts that were implemented in mid-July. To-date, for 2019, we have announced and executed on initiatives that reduce our annual cash cost by more than $25 million spread across the entire enterprise. I would note that since the second quarter of 2017, we have successfully transitioned our business and taken approximately $21 million or 44% out of annualized spending, specifically related to corporate, general and administrative and research and innovation support functions, excluding stock based compensation expense. As we discussed in previous calls, this has been a tough but necessary process as we further adjust our cost structure to ensure long term success. Once again, I appreciate all of our employees for their efforts and dedication through this process, which has impacted all levels of our business. Finally, our strategic capital committee continues to make important progress in their analysis of alternatives for the best use of the net proceeds received from the sale of Florida Chemical at the end of February. As discussed on our last call, under the co-chair direction of our Chairman, David Nierenberg and CFO, Elizabeth Wilkinson, the committee began its evaluation process with a deep dive into every facet of the company. When that was concluded, we initiated a methodology to review, both organic and inorganic inbound growth prospects, that Elizabeth will discuss in more detail in a moment. Throughout this effort, we've utilized Citi and their deep domain expertise to assist us. I cannot overstate how important we consider this process to be. Clearly, the capital markets have always put an emphasis on liquidity. But over the past year, investors' sensitivity about liquidity has become even more heightened. We fully agree that a solid balance sheet and financial flexibility are critical to long term success, especially in an industry that is commodity based with ongoing and sometimes extreme periods of price volatility. As such, we believe that we have an extremely unique opportunity, and the committee is determined to ensure that they arrive at a strategy that preserves and enhances maximum value for our shareholders. With that, I'll turn it over to Elizabeth to discuss our financial results in more details. Elizabeth?

Thanks John. Similar to last quarter, the financial tables in our press release present the operations of CICT segment as a discontinued operation for all periods. As such, I will focus my discussion today on quarterly results for our continuing operations, which includes our energy business, as well as our supporting research and innovation and corporate functions. At going John's comments, we operated in an environment that has continued to be volatile for U.S. onshore drilling and completions activity. This impacted both our top-line and margin results for the second quarter, and we expect these conditions to continue to impact us in the third quarter. Revenue for the second quarter was $34.7 million compared to $43.3 million for the first quarter. As John discussed, in addition to the challenging industry backdrop for U.S. land, our results were directly impacted by the rebuilding of leadership and personnel in our sales organization, the deferral of completion activity to the third quarter by certain clients, and the utilization of performance driven pricing programs for a limited number of strategic clients. Operating expense was $38.3 million for the second quarter versus $44.6 million for the first quarter. Fundamentally, the decrease in our operating margin was due to fixed and semi variable costs being absorbed by a lower level of revenue. Looking at the third quarter, we expect our top-line results could decline from second quarter due to the factors we've discussed. However, we do see opportunity for significant margin improvement, primarily as a result of increased efficiencies in our logistics, including last mile delivery, and other operational cost reduction initiatives. Corporate G&A decreased to $6.1 million from $7.3 million for the first quarter, primarily due to non-recurring severance costs recorded in the first quarter associated with our sale of Florida Chemical. Research and innovation costs decrease to $2.1 million from $2.3 million in the preceding quarter. The decrease is a result of our cost reduction initiatives announced in prior periods. Moving down the income statement, interest expense was essentially zero as compared to $2 million for the first quarter. As a reminder, following the closing of the sale of Florida Chemical, we paid down the full balance and terminated our credit facility. This resulted in the acceleration and write off during the first quarter of $1.4 million of unamortized deferred financing costs. We reported the second quarter loss from continuing operations of $13 million or 22% -- a $0.22 loss per diluted share compared to a loss of $15.4 million or $0.26 loss per diluted share for the first quarter. On an adjusted earnings basis, we reported a second quarter loss from continuing operations of $12.3 million or $0.21 loss per diluted share versus a first quarter loss of $11.6 million or $0.20 loss per diluted share. Please refer to our tables in release for more details. Our adjusted EBITDA for the second quarter was a loss of $9.6 million compared to a loss of $8.3 million for the first quarter. Contributing to the higher loss were tighter margins, partially offset by lower G&A and research and innovation expenses. Again, please refer to the tables in the release for more detail. Turning to the balance sheet. As of June 30th, we have cash and equivalents of $97.5 million, which were essentially level with our $96.8 million balance at the end of the first quarter. I would note that the third quarter we currently expect to see a similar level of cash at the end of the period. At the end of the second quarter, we also continued to have no debt outstanding. In addition, at the end of the period, we reported approximately $15.7 million of escrowed funds on the balance sheet, reflecting a revised estimate of post-closing working capital adjustments related to the sale of Florida Chemical. As John discussed, we continue to execute on our cost reduction initiatives during 2019. This includes the mid-July implementation of more than $5 million of additional annualized spending cuts. These reductions were substantially focused on further restructuring our operations, reducing both personnel and other operating costs, while ensuring we retain the ability to absorb top-line growth we anticipate later this year and into 2020. Combined with our previously announced reductions, year-to-date, we have implemented initiatives that reduced our annual cash cost by more than $25 million. Looking beyond the $25 million that we have announced thus far this year, we are currently in the process of developing an action plan to execute on the priority initiatives that have been identified through our engagement in the second quarter of a global consulting firm recognized for their extensive supply chain expertise, particularly in the upstream energy space. Over the course of several weeks, they conducted an interactive assessment to help us to identify and prioritize additional opportunities to reduce costs and drive greater profitability through order the cash efficiencies, including process enhancements to sales, supply chain and logistics. Turning attention to the strategic capital committee. As co-chair the committee, I wanted to provide some additional perspective on our process. Since its formation, the committee has formally met eight times, utilizing research and advice provided by Citi's energy team, as well as detailed analysis performed internally. As discussed on our last call, the committee first focused on taking a deep dive into Flotek's ongoing business. This include a thorough assessment of every product, service, process, market, distribution channel and customer. From that process, we gained a better understanding of what we do well, where we can improve and potential opportunities for growing our business. In addition, we have undertaken an exhaustive review of the different alternatives for the best use of capital using a lens of what protects value and drives maximum returns for our shareholders, including how to best position this company over the longer term in the public capital markets. The sale of Florida Chemical has provided Flotek with a substantial amount of financial flexibility. This places Flotek in a unique position relative to similar size oilfield service providers, as well as companies in the upstream oil and gas space in general. Accordingly, while a nominal stock buyback or special dividend to shareholders has some appeal, at present, the committee has not recommended any action that would undermine the advantages that dry powder provides Flotek in the energy sector today. As further outlined on Slide 16, our near-term focus is on the possibility of investments in organic and inorganic opportunities that will provide us with greater scale and immediate positive operating cash flow, while building on and enhancing our core competencies. As John discussed in his opening comments, we fully recognize that we must evolve the business to ensure our long-term success in a very fragmented oilfield services space. Through the committee's evaluation process, we have identified a number of high value organic growth opportunities that we believe could result in greater scale and improved profitability. These growth opportunities include targeting clients of scale, establishing strategic partnerships, commercializing differentiated next generation technologies and expanding adoption of our chemistries for enhanced oil recovery. While these initiatives are expected to be capital light in nature, we recognize that realizing the full benefits of our efforts will take time and require working capital. As it relates to energetic investments, we continue to be focused on broadening our exposure across the lifecycle of well as opposed to remaining as significantly concentrated on the completion stage. As expected, we have continued to receive and evaluate inbound inquiries. And we have also taken an active role in identification of businesses that logically align with our core competencies, and provide for both financial and operational synergies. An important priority is to focus on opportunities that not only meaningfully grow our business, but bring immediate and stable positive cash flow to the table. I'll now turn it back to John for his closing comments. John?

Thanks, Elizabeth. The onshore North American upstream oil and gas industry continues to evolve rapidly. More recently, this has included heightened investor scrutiny of capital spending, cash flow generation and return on capital considerations. As a result, oilfield service providers are under more pressure than ever to provide E&Ps with superior product and service offerings and as I mentioned earlier, technical differentiation. We, like many others in the industry, believe the truly customized chemistry and fluid systems for the reservoir is the next critical step to drive enhanced, both near and long term, well production and related economics. We recognize this many years ago. And even with our significant cost cutting efforts, we have not compromised our efforts to expand our unique portfolio of proprietary products and further enhanced our in-house technical understanding of fluid system design and application. As we've stated in the past, we believe this sets Flotek apart from its competitors. In closing, we are optimistic that our differentiated technologies combined with our proactive efforts to enhance our financial performance and improve our operations and sales capabilities, are positioning Flotek for long term success. So with that, we will now open it up for questions. Similar to the last couple of our calls, given his role as Co-Chair of the Strategic Capital Committee, I've asked David Nierenberg to join us during the Q&A. Operator, we'll now open for calls.

So John, if I may before we go into the question and answer mode. I'd like to make some comments as well about the Strategic Capital Committee. There's no question that Q2 was public. And as Elizabeth described, there was a fair amount of non-recurring and housekeeping events, which made it look even uglier than it actually was. But it was ugly. However, my new job as non-executive board chair and as Elizabeth is co-chair of the strategic capital committee requires that we follow the wisdom of that sage, John Rivers, who said, get over it, grow up already, and we are. We will not panic. We will not make rash or short term asset allocation decisions. Rather, we will use time arbitrage to help Flotek get well as it buys time through continued intense cost reduction shrewd monetization of its strong balance sheet, sharpening Flotek's strategic focus, enabling our new sales team to rebuild sales momentum and finding the right leader to execute our strategy well for the benefit of all stakeholders. We pledged a substantial strategic update today, here it is. We are making considerable forward progress, deliberating about and selecting among competing alternatives, ranging from paying a special dividend, to share repurchase, to investing in profitable organic and inorganic growth. Each prospective allocation have been weighed and weighted using such factors as; the current capital markets for oilfield services companies, which makes our balance sheet strength extremely advantageous today; the strength and weakness of Flotek; a preference to build on Flotek's profitable strengths, but not on weaknesses; a willingness to consider inorganic growth if it would magnify our strengths, provide economies of scale reduce risk and make us immediately profitable; and attracting strong leadership. Now I want to amplify on these words. Our assessment of the current widespread wreckage in the oilfield services capital market today with so many once mighty companies share prices knocked down to under a buck or single-digit and with such pervasive fear of debt repayment, access the capital and busting covenants and with energy stocks being so out of favor as a percentage of the entire S&P 500 capitalizaiton, convinced us that we are in a buyers' market today for energy businesses. Therefore, we should recognize the very considerable opportunity costs of using cash mainly for financial engineering, the opportunity cost of possible misallocation of capital today is about as high as I've ever seen it. Because our cash is so strategic revaluable now, we are intense about protecting it four ways; continuing to reduce cost, managing our balance sheet to generate cash through monetization of working capital controlling CapEx and discretionary investments and collecting escrows; steering the mix of our product sales toward our most profitable products; and using our new upgraded sales team to drive revenue growth again. Our policy has to be this, do not let our cash become a melting block of ice. Rather, use time to make prudent profitable allocations of scarce capital in a buyers' market. Moving on to the strategic capital committees' second criteria, and assessment of our strengths and weaknesses so that we can better build on strength, I will share with you that I probably did not endear myself to my colleagues on the strategic capital committee initially. When I asked the committee to refresh and review our due diligence about CnF's effectiveness. Of course, I had evaluated it twice before. But after changes in drilling and completion techniques, new competitive offerings and some client losses, I wanted to revisit that, again, to make sure that we were building this company on a solid foundation. And we examined many, many data points from large customers, not our data but their data, which was extensively analyzed. And it gave solid proof to all of us that CnF has compelling value, and it is profitable and it has a strong patent portfolio protecting it and it is maintained and constantly improved by the strength of our R&I organization. So you might wonder then, why did it decline. But you've heard in the past, three reasons for that. You heard that street pressure on operators to live within cash flow after the decline in the price of oil hurt. You heard about fear, uncertainty and doubt spread by competition. And you know that with sponsor turnover, particularly in private equity backed companies when they exit, that can create discontinuity. But with Mark Lewis joining us, we have learned that we had opportunities to significantly upgrade our sales team by making it stronger in chemistry and enabling it to provide better long-term customer service, this is our learning. And we believe that it will enable us to make CnF grow again, because it is a solid product. So properly sold and serviced and sold to the right prospects, CnF has substantial value and is profitable for Flotek, it is a solid foundation on which to build the company. We believe CnF's best niche opportunities probably are private and private equity owned operators, because they take a longer term view the industry does, foreign nationalized oil companies for the same reason, they take a longer term view. Companies and executives, which have been disappointed by what John talked about, which was this so-called, "mechanical productivity solutions", which sometimes cause more harm than good. So we do think that there's finally substantial potential opportunity to grow CnF outside of drilling and completion. In the production side, focusing on what's either called EOR or IOR, and we already have dozens of proof points in the United States and Canada about its impact in that context. Moreover, the production side of the business is recurring revenue, and it is relatively insulated from competition from the large contractors. So if I may borrow from Ronald Reagan, there definitely is a pony in this room, and this pony's name is CnF. If CnF were not the pony, then the strategic capital committee could lean towards paying out a large special dividend, or even towards selling the company. But a profitable core product, which adds value, which can be focused and grown and which has growth opportunities in EOP, we definitely want to build on that. And our C&S growth opportunity is being substantiated in real time by half of dozen large customer prospects. We do have several other organic growth opportunities in other parts of the company. We just don't have time to talk about them this morning. Next, because we are in a buyers' market for oilfield services, have $100 million and are protecting it vigilantly, the strategic capital committee is evaluating inorganic growth opportunities, which to grow revenue and profit. Our evaluation of these with Citi has already considered approximately 40 possibilities. Our acquisition criteria include these goals; buying immediate positive EBITDA in a buyers' market, therefore, not buying a startup, not buying the bleeder, but a well-managed partner with scale and profit; second, finding opportunities to realize economies of scale and functions where we must become stronger, such as purchasing logistics and last mile delivery that were especially in basin scale is important; adding organic growth, assistance selling CnF into EOR and IOR markets; working with a partner, which has scale and is networked into the production segment of the market; insulating Flotek from the extreme cyclicality of the drilling and completion segment and competition from large contractors, which have integrated chemistry businesses; logistical and last mile help for our Prescription Chemistry Management business; the next generation of leadership for the company; and finally, R&I, has the ability to help companies with whom we might partner de-commoditize products in their portfolios just as they are doing for us. To conclude, we would like to take full advantage of the balance sheet strength, which our cash is so precious and valuable today relative to paying out cash and dividends or repurchases. There is no certainty that we will make an acquisition, nor should we act under pressure to make one. But there would be a very different certainty if we had dividend and out the cash or use the large portion of it to do repurchases, because that cash then would be gone and could no longer be used to buy and build growth, scale, profitability, and build further on our solid C&S platform in a buyers' market. So we're going to keep the pressure on cost reduction, protect our cash, grow CnF and scour this buyers' market for sensible prudent business combinations, which could add value. That's the end of my comment.

Thanks David. And operator, go ahead, we will take questions.

Thank you, sir [Operator Instructions]. The first question comes from. Please go ahead.

John, I guess I appreciate all the commentary. First place I wanted to start I guess was on strategic side. David, you gave a lot of detail and thought into how you're thinking about moving forward. And certainly, appreciate the lack of wanting to purely use financial engineering here with the cash on hand. Sounds like there's considerable amount of opportunities that you're looking at, taking into account what I think is a prudent thing to do, right? Immediately, at least, accretive positive cash flow business for you. How do you think about the sizing of those opportunities? And particularly, given where as you mentioned, there's been stress on leverage demand within the old service space? How do you think about the long term leverage you're willing to put on this business, depending on you finding the right opportunity on the acquisition front?

I want to make sure I understand your question, right? Did you asked how much leverage we want to put on the business?

How much leverage, I guess, long term that you'd be willing to put on the business depending upon the acquisition that you may find?

A two word answer would be, not much. Not much in this capital environment.

Okay, make sense. Just wanted to make sure, given there are some, it sounds like, sizable opportunities out there. Okay. Second question, on the sales front, you guys mentioned the addition of Mark. Just wanted to get a few more thoughts on, just detail on the sales team impact and how quickly we may be able to see that on the CnF sales front? And then second part of the question, just the performance pricing program you all have mentioned. And John, I think you mentioned 4Q, we could start to see that that positive turn. Just any more detail you can provide on that process would be great.

Sure. So, as everybody who's familiar with the story knows that the sales cycle on the CnF is typically at best to 60 days and sometimes 120 day process. It's just the way it works by the time you get the right amount of people and the right people around the table. But we are trying to accelerate that with these strategic targeted performance-based engagements. And I think we're not going to say with who but we will say that we're encouraged with the acceptance of those from a client perspective and also, the early indications of what we felt would happen. With respect to the sales group. As we mentioned in the earlier remarks, we've been able to attract folks from different parts of the value cycle, whether it's been rock property analysis with some log background, whether it's more from a distribution standpoint of companies that are in that value cycle. So we have a much more diverse sales approach than we had earlier that's recognizing. The E&P companies themselves are becoming more diverse with the people that are involved in selecting the chemistry. And we think that's exactly where we need to be. And I think an important thing to mention, again, is that one of the driving reasons for those folks joining us is they wanted to interact with the ultimate end user. And that's obviously was a criteria for us and they've met that criteria. Hopefully, that helps, George.

The next question is from Mike Urban of Seaport Global. Please go ahead sir.

So helpful commentary on the outlook, and obviously very thoughtful process around the valuation of the business, presumably before you look at any type of acquisition, and I would generally agree that it's certainly a buyers' market. But at the same time, clearly that add value, which in my perspective, would be just having the organization structurally profitable, such that you're just not adding, not only revenue and EBITDA to just structurally unprofitable business. So if we take a step back in Q2, obviously, there's some reasons for that. Could lay out a path to when and how we get to that point where it might make sense to layer something on? I guess, is there starting point with the incremental $5 million in annualized savings that still get you there. How much of the negative EBITDA, if you will, were things that you think will reverse here, are some of these transitory factors. But again, just more broadly a path to at least getting this thing to a point where it might structurally make sense to layer on another business?

Yes, I'm going to get Elizabeth give you a little bit more context on that. Clearly, the overall macro environment that you've listened to throughout the earnings season is going to be a challenge for everyone in the third quarter. And now people are wondering where people going to run out of money in the fourth quarter for heaven sakes. So this is a position for Flotek that we have to drive the top line in a profitable way. And as we started out with our remarks about controlling the controllables, we have right sized this enterprise in a way that you'll see meaningfully improvement in the EBITDA number through the remainder of the year with the qualification that there still needs to be a sustained level of macro activity in North America. But Elizabeth can chime in with a little bit more context to give you a pathway forward.

So I guess what I can add is just the EBITDA outlook. Driving think into the year, we were very focused on trying to adjust our business, especially from the cost cutting perspective that would allow us to get to even breakeven and positive EBITDA in latter part of the year. And I think it's definitely going to be challenging to do that. Based on what we've been seeing at this point in the year. But we remain hopeful that we'll be moving significantly in that direction. So much depends on revenues. When we're looking at this whole thing earlier in the year, we're really anticipating a year lot more like last year. On the other hand, we're doing a lot of things to improve our cost structure. So what I can tell you is that we are being very strategic in making meaningful traction later in the year. And we think that our strategy that we have in place will speak loudly as we see some of these things develop later, we'll speak loudly for our future prospects.

Mike, we appreciate the leaning of your comment and your questions. We are using the current period to continue working on structure. We are also, as you know, we've made two great additions to our management team this year with Elizabeth and Mark. And we are continuing to build a solid foundation here, because you're right. It would not be sensible to be making an acquisition until such time as we felt about how we were operating. And we're getting there. We're getting there fast. But you're quite right.

And I guess, again, I just realized you're still going through this process. But any kind of help you can give us, even kind of on a backward looking basis in terms of the second quarter of the things that kind of drove the magnitude of that negative EBITDA. Again you referenced some things being better on logistics, customer studies and things like that. Because if we're talking about $40 million-ish of annualized negative EBITDA, you take out $5 million and you're still -- in costs, you're still at kind of negative $35 million that's a lot of revenue. I'm just trying to -- if it helps at all kind of bridge that, I think that'd be a big help for us and for people on the call and potential investors.

So I mean, just generally, I think we talked about things, which I think -- the revenue side, on the cost side. We basically have cost cutting activities that we've just undertaken that are going to cut our personnel costs significantly, as well as certain logistics contracts changes that we've made, which we also think will continue to improve those costs. So I think it's just a combination of some different things playing in that we believe we will be seeing some improvement, notwithstanding the revenue pressures.

Well, I guess maybe that's a better way to tackle it, I mean the kind of the macro backdrop. Certainly, you said you're focusing on what you can't control. You can't really control the macro backdrop. But once you get through all of the things that you can't control, the cost efficiency and I think on some of these kind of one off or anomalous costs with the kind of normalized cost structure that you envision. What level of revenue would it take? So we can kind of take -- we can all make our own assumptions on the macro. But what level of revenue would it take to get to that EBITDA breakeven level?

I guess, generally, we've been wanting to see things getting back to something in the sort of first quarter type of revenue range, or higher, to get us back into that neighborhood where we think that's achievable.

Mike, a lot of it has to do with the mix, the products sold, the higher the mix of CnF, the lower the breakeven level.

And then would you -- again with respect to the timing. Is there any expectation in your current outlook that you see a meaningful international sale over the balance of the year?

So we're continually encouraged by the international activity, both in South America and the Middle East. For market competitive reasons, we're not going to get into a whole lot of detail except to say this. In early September, both Elizabeth and Mark are headed over to the UAE to establish a Flotek branch office there. And I think the takeaway we'd like to leave is we wouldn't be going through that effort if we didn't feel comfortable about the near and midterm outlook of increased activity in the Middle East. And I think we'd like to leave it at that for now.

And then I guess just couple of housekeeping things, I think I may have missed it. You're continuing to reduce G&A costs. You've done a great job on that. What's your expectation for the third quarter?

So generally, we're on track with our goal for getting done on a cash basis to something in the neighborhood of $5 million. However, we do know already that based on the outcome of our price uptick as a result of the sale of Florida Chemical when we did our fair value on our stock-based compensation, our costs have gone up considerably to the point where we're probably going to have an extra $400,000 a quarter just for stock-based comp So on a cash basis, I think we're going to be in that neighborhood. But on a overall total expense, I think it's going to go up a little bit.

So up relative to I guess $1.2 million of stock based comp in 2Q, so up $300,000, $400,000 to that?

So I mean, we still think it's going to be coming down from the Q2 level, just to be clear. But I just don't think we're going to get down to that $5 million level for the total expense.

And then last one for me. What's your full year CapEx expectation?

Approximately $3.7 million…

[Operator Instructions] The next question is from [indiscernible] of [Wylan Management]. Please go ahead, sir.

Elizabeth, on the call, you mentioned that you expect the cash position to be level at the end of Q3 to where it is right now. Does that assume that you guys are collecting some of the escrow funds, or is there just more working capital to take out in the meantime that gets you to cash flow breakeven number for the third quarter?

Yes, it does actually assuming that we would be collecting some of the escrowed funds. And that is one of the things that it will be a little bit in play, because we haven't finalized our agreement with ADM with regard to how much of the adjustment escrow will be entitled to. So that process is still ongoing. So there is a little bit of play there depending on the determination of the adjustment escrow, the post-closing working capital adjustment at escrow.

And then in terms of working capital. Is this a good -- where we ended at the end of Q2, is that kind of a good level to kind of think about going forward? Or is there more opportunity to still pull cash for the business and still pull some cash out of working capital from where we are today.

No, I don't really anticipate. Like for example, the change in our inventory, I don't anticipate that we're going to be continuing to do that further. I mean, we've basically tried to adjust and allow ourselves to play out some excess inventory that we had on hand. But we're definitely going to be getting very, very focused about -- I mean, as part of these costs initiatives that we talked about undertaking. Right now, one of them is very, very focused on procurement activities and inventory management. But I'm not sure that that's necessarily going to mean that it's lower than what you're seeing right now. In fact, we might have a little bit of an inventory build just based on our expectations.

I want to change gears a little bit, one of the things that that was noticeably absent from the conversation around what you all planning to do with the cash cushion right now was just, you didn't really explore the, or didn't talk about the exploration of selling the business. You guys are now trying to build these relationships that there are a lot of people, a lot of bigger companies out there that already have those in-basin relationships that you guys want to get deeper with. And there's obviously a lot of overhead into running your business that exists that wouldn't exist in the hands of one of those companies. And with sitting here thinking as a shareholder would -- could potentially create a lot of value in a shorter time than going out and building these relationships and building the business. So can you guys just comment a little bit on that and what you've explored there?

When the company has a strong balance sheet and it's turning itself around, I think the sense of the committee is, and I think I can speak to the board as well, is that if we were to do what you were saying, it would make a lot more sense to do that, at the time when the company was performing very well and was perceived to be performing very well. And so when I used the phrase time arbitrage earlier, that's one possibility. But again, if a company has a very weak balance sheet and isn't performing well, then they need to tell itself. But we have a lot of opportunity to add value to what we have here. And we have -- I think, all of us come to the conclusion is the better thing to do is to keep our head down and make those good things happen.

We have reached our allotted time. I'd like to turn the conference call back over to management for any closing comments.

Thanks, operator, and thanks for the questions. And hopefully with David's input as well there, we are able to provide as much clarity and context as to where we are and where we believe we're headed. Hopefully, we'll have a chance to see some of you in person in Denver on Wednesday next week when we present at EnerCom's Oil and Gas conference. For those of you who can't make it, you can listen to it on the webcast. It will be going around 10:15 Central Time. We'll also participate in Johnson Rice's Annual Energy Conference that will be held at September 23rd to the 25th in the Big Easy, in New Orleans. Again, thanks for everyone's continued interest in Flotek. We appreciate the patience and support of our shareholders. Hope everyone has a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.